Credit Derivatives: Definition & Types


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Sam has given a loan of $10 million to Linda in return for 10% interest payments annually. Now, he enters into a contract with Danny where Sam pays Danny $0.7 million each year until the maturity of the loan, but if Linda fails to repay the loan Danny has to repay him $10 million as well as any remaining interest. What type of credit derivative is this?

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1. In a total return swap, the two parties exchange _____

2. A bank sells credit derivatives to investors and purchases low-risk government bonds from the money received. The investors receive the loan payments from the borrowers. What type of credit derivative arrangement is this?

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About This Quiz & Worksheet

Use this worksheet/quiz to discover how much you know about credit derivatives. Quiz questions will address specifics such as a credit derivative that has to do with a loan and a total return swap.

Quiz & Worksheet Goals

Answer questions on these key points:

  • The selling off of credit derivatives in exchange for low-risk government bonds
  • Funded/unfunded credit derivatives
  • Defaulted loans

Skills Practiced

  • Reading comprehension - ensure that you draw the most important information from the related lesson on credit derivatives
  • Information recall - access the knowledge you've gained regarding a total return swap
  • Knowledge application - use your knowledge to answer questions about loans and the way credit derivatives are sold in exchange for low-risk government bonds

Additional Learning

Consider the accompanying lesson entitled Credit Derivatives: Definition & Types for further insight on the following topics:

  • Credit derivatives associated with pensions
  • Transfer credit risk definition
  • Explanation of credit derivatives
  • Difference between unfunded and funded credit derivatives
  • Examples of these kinds of derivatives